Tearful Magnit founder sells out to banking group VTB for $2.5 billion

SOCHI, Russia (Reuters) - Russia’s Sergey Galitskiy has stepped down as CEO at the Magnit (MGNT.MM) supermarket chain he founded and sold most of his stake to state lender VTB (VTBR.MM) for about 138 billion roubles ($2.5 billion), bringing Kremlin influence into the retail sector for the first time.

Galitskiy, 50, who founded Magnit in 1994, told a news conference with VTB chief Andrey Kostin it had not been an easy decision to sell. “I founded this company, but time passes and nothing is for ever,” he said in a voice cracking with emotion.

The sale follows a difficult year for Magnit, as its market value halved on concern over slowing growth that resulted in it being overtaken by rival X5 (PJPq.L) as Russia’s biggest retailer.

Magnit said VTB paid 4,661 roubles per share, representing a discount of about 4 percent to Thursday’s closing price of 4,850 roubles. By 1434 GMT on Friday the shares were down 7.8 percent in Moscow at 4,472 roubles and had dropped 11 percent in London.

Galitskiy have no specific reason for the sale but said: “The final push came from the fact that the company’s investors stopped seeing eye to eye with its shareholders over what the situation looks like going forward.”

Magnit’s stores, which target lower-income consumers, have struggled to compete against aggressive discounting by X5 and last month the group reported a 42 percent drop in quarterly net profit and said it was unlikely to pay a dividend this year.

At one point at the news conference Galitskiy was overcome with emotion and said he could not speak, prompting Kostin, a close ally of Russian President Vladimir Putin, to put a sympathetic hand on his shoulder.

‘UPSIDE UNCERTAIN’

An asset manager at a large international fund said investors were unlikely to cheer the deal.

FILE PHOTO: A police officer stands guard near a sign with the logo of the Russian lender VTB at the Moscow International Business Centre also known as "Moskva-City" in Moscow, Russia November 21, 2017. REUTERS/Maxim Shemetov

“(Magnit) is a very complex business, it requires constant attention from management, and it’s hard for me to imagine that VTB has that expertise,” the asset manager said, speaking on condition of anonymity.

“First, VTB is a bank under sanctions. Second, it’s a state bank. These are all risks, while an upside is uncertain,” he added.

Along with other Russian banks, VTB is subject to sanctions imposed by the U.S. government over Russia’s annexation of Ukraine.

VTB may at some point sell its stake in Magnit, but the investment is not a short-term project, VTB chief Kostin said at the signing of the deal in Sochi.

“We hope that our experience, coupled with the financial resources of VTB, will help bring Magnit up to a good, new level of development,” Kostin said.

ONE-MAN SHOW

Kostin said he was confident Magnit’s shares would increase in value in the medium term, but analysts cautioned that prospects for a turnaround were uncertain, emphasizing the role that Galitskiy played.

“Magnit has always been viewed by investors as a one-man show, hence the shareholding and management change will likely be taken as clear negative,” UBS analyst Ulyana Lenvalskaya said.

Citi analyst Brady Martin said: “We believe that Galitskiy has a devoted following amongst investors which has contributed to the shares’ traditional valuation premium to peers. His departure implies, in our view, reason for further de-rating.”

Separately on Friday VTB announced a planned partnership between Magnit and the Russian postal service in logistics. Galitskiy, meanwhile, will likely indulge his love of soccer. Already the owner of Krasnodar soccer club in southern Russia, he said: “I will live in Krasnodar and probably be engaged in children’s and youth football. That’s all I think.”

Asked if he would buy back his Magnit shares if the opportunity presented itself, Galitskiy said: “If you’re leaving, leave. I’ve done all I could in the company. People should come in who have the motivation to do more.”

($1 = 56.2110 roubles)

Reporting by Polina Nikolskaya, Olga Popova, Maria Kiselyova and Olga Sichkar; Writing by Polina Ivanova; Editing by David Goodman and David Holmes